Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, we'll turn our attention to small-cap winter products supplier Douglas Dynamics (NYSE:PLOW), and I'll show you how and why this tiny $328.5 million company can pack such a dividend punch for income-seeking investors.
I don't often highlight very many small caps in a series on great dividends for a number of reasons -- most notably because small caps rarely pay a dividend. Steady dividends are often associated with stodgy but stable businesses that have been around for as long as the mind can recall. Most small-cap companies just don't fit that mold -- but Douglas Dynamics does!
At the mercy of Mother Nature
Unfortunately, just because it fits the mold of a typical dividend stock doesn't mean its shareholders are exempt from potential downside. As a retailer of snowplows (I'm assuming you guessed that by its ticker symbol, PLOW), sand and salt spreaders, and other snow and ice controls, Douglas Dynamics is very much at the mercy of the weather. Last year was particularly tough, with droughts and exceptionally warm weather putting an early end to winter and causing Douglas to report some mind-numbingly bad quarters. If it's any consolation, though, Douglas Dynamics' poor results were among good company.
Ski resort Vail Resorts (NYSE:MTN) suffered in a big way with less snow on the ground. Vail turned to boosting season ticket passes as an attempt to recoup some of its losses for the shortened season but still produced only $0.45 in full-year EPS compared with its average full-year EPS in the previous six-years of $1.42.
Snowmobile makers Arctic Cat (NASDAQ:ACAT) and Polaris Industries (NYSE:PII) also saw their fair share of problems. If not for a new line of snowmobile products, Arctic Cat would have probably seen its fiscal 2013 snowmobile sales dip. Instead, thanks to an incentive-laden lineup, Arctic Cat was able to grow snowmobile sales by 5%. For Polaris, it saw total sales for fiscal 2012 rise 21% with little help from snowmobile sales, which grew by a measly 1% despite a slew of new snowmobile products. In short, if the weather doesn't cooperate, you as an investor are going to just be a spectator along for the ride.
The Douglas Dynamics advantage
It might seem counterintuitive to even think about investing in a company whose business is ultimately controlled by the weather, but there are plenty of advantages that Douglas Dynamics brings to the table that should have investors forgetting all about 2012.
To begin with, Douglas Dynamics is the premier name in snowplow and snow and ice control equipment. As the leading name in snowplow market share with brands such as Western, Fisher, and Blizzard, and both fixed and detachable snowplow options for its customers, Douglas Dynamics is going to bring in almost guaranteed cash flow year in and year out.
However, Douglas Dynamics is also doing what it can to expand its product line beyond just winter-based products. With its acquisition of TrynEx for $26 million in May, Douglas acquired a wintertime SnowEx salt spreader, as well as TurfEx, a lawn and sports-turf maintenance seeder and sprayer, and SweepEx for the removal of debris in industrial applications. According to Douglas, the transaction will be cash flow and earnings accretive in fiscal 2014. More importantly, it helps expand Douglas' revenue stream beyond just the winter months, which will help should another drought-filled year hit again.
Ultimately, though, I think last year's odd weather serves as potentially the perfect entry point for Douglas Dynamics. If you look back at the past couple of decades of weather history, you'll see that snow levels are rarely anywhere near as low as they were last year. This means that as weather patterns revert to normal, Douglas will be able to rake in profits at a faster clip that investors or Wall Street analysts are anticipating. Plus, it'll face some particularly easy quarter-over-quarter comparisons as we head into the upcoming quarters.
Show me the money, Douglas Dynamics
Despite the company's dominant market share position in snowplows, it's Douglas Dynamics' focus on returning cash to shareholders that really has me most impressed – especially considering that it went public only three years ago.
Since initiating a dividend in September 2010, Douglas has raised its quarterly stipend three times, sticking with its promise to reward shareholders even when last year's weather failed to cooperate. Overall, Douglas has raised its payouts a cumulative total of 13.7% in the past 12 quarters.
The past two dividend increases have been only a half-cent and a quarter-cent, but it's the yield that can really add up quickly here for investors. Based on Douglas' closing price of $14.78 per share on Friday and its forecasted payout of $0.83 going forward, shareholders are going to be raking in a U.S. Treasury bond-thumping 5.7% yield. At this rate, if shareholders were to reinvest their dividends back into Douglas' stock, they could double their initial investment in less than 13 years! That's an incredible payback that deserves some recognition.
Just because Douglas Dynamics isn't a multibillion-dollar multinational corporation doesn't mean it can't provide big gains and hefty dividends for income-seeking investors. With the lion's share of the snowplow market and a more diversified product pipeline than at any other time in its history, Douglas is poised for decades of dominance as long as the weather remains even remotely close to its historical snowfall average. Furthermore, with management focused on maintaining a steady dividend plan, shareholders can rest assured that they'll be well taken care of. This stock and its impressive dividend could be your ticket to plowing over the competition.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Arctic Cat, and recommends Douglas Dynamics, Polaris Industries, and Vail Resorts. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.